10/20/2011

The EU, not the G20, must settle eurozone crisis

The date of the G20 summit in Cannes on 3-4 November has become a deadline for the eurozone to sort out its sovereign-debt crisis. This deadline bestows an importance on the G20 meeting that it otherwise does not merit. While it is true that the European Union has contrived to turn the debt crisis into a source of instability for the entire global economy, the G20 is not the means of global governance that its champions wanted it to be.

The combination of developed countries and developing economies might look impressive when it comes to the photo-calls, but the more important question is whether the G20 is effective. Some people have been deceived by a G20 summit of 2-3 April 2009 when, with the shockwaves from the collapse of Lehman Brothers still rippling, the G20 did put on a show of action, in what was perhapsGordon Brown's finest hour in an otherwise unhappy few years as British prime minister. But, judged by more than one meeting, the G20 is doomed to disappoint. The ineffectiveness of last weekend's G20 finance ministers is the norm.

The group is too large for effective decision-making, particularly because its members have such disparate interests. Yes, it does provide another forum for the likes of Brazil and India to speak to (and challenge) the flag-wavers of Western capitalism, but it is not the place where new policy will be negotiated. The G20 was created because of dissatisfaction with the G7 (G8 with the addition of Russia), which is too Western and too northern, has too many European countries, and is no longer an accurate reflection of where economic power lies. Those criticisms are justified – any club that includes Silvio Berlusconi's Italy, which has attained a status of irrelevancy even on as limited a stage as Europe, must be deeply suspect. But if the creation of the G20 has done anything, it is to permit the perpetuation of the G7. The demands for root-and-branch reform of the G7 would be unstoppable if the G20 did not exist. As it is, the leaders of Europe's largest nations are condemned to an endless round of summitry – EU, G8, G20, UN, etc, etc – whose value does not match the expense. In so far as global economic governance is possible, it will be achieved through a G3 or G4 – the US, China, the EU and, perhaps, Brazil. That configuration can be tweaked and argued over (some would put the case for Saudi Arabia to figure as a representative of the Gulf economy), but it cannot and should not be stretched as far as a G20.

The members of the European Council would do well to bear these weaknesses of the G20 in mind. When they meet in Brussels on Sunday (23 October), the leaders of the EU's 27 member states should not kid themselves that the G20 stands ready to resolve any questions that they fail to answer. The G20 is a deadline, but not a second chance, and ducking out on Sunday is not an option. For more than a year, the eurozone's leaders have, as the worn-out cliché puts it, been kicking the can down the road. They have now run out of road. The EU has to use its own decision-making machinery – of which Friday and Saturday's meetings of finance ministers are an example – to resolve the difficult issues.

Although some people, notably spokespeople for the German government, have been trying to play down expectations ahead of Sunday, the eurozone's trading partners – the US and, less vociferously, China – have worked out that the stakes must be raised to ensure that Europe does not run away.

The eurozone has to come up with credible answers – to the immediate problem of Greece and a possible default, to the broader challenge of how to harness enough lending power to ward off debt contagion, and to questions about the capitalisation of European banks. If Sunday's meetings do not come up with plausible responses, then the deadline of the G20 meeting will be irrelevant. By the time the summitry moves to the French Riviera, the financial markets will have delivered a merciless verdict.